The Last Annuity Standing: FAs v. VAs

The Last Annuity Standing - earlebird.com

It comes down to this, folks: Two retirement mainstays will battle it out. The variable annuity (VA) has outsold the fixed annuity (FA) for years, but that doesn’t necessarily make it a better product. With its stock market potential, VAs have an almost unfair advantage over the slower FA. But will the tortoise once again vanquish the hare? Let’s find out. Are you ready to rumble?!

Cue the Q&As:

How does a VA compare to an investment account like a mutual fund?

I prefer owning a mutual fund. Performance and fees are so much lower with a typical mutual fund. And an exchange-traded fund (ETF) would blow the doors off a VA. Mutual funds also step up the cost basis at death so you don’t pay taxes on appreciation built up over the years. With VAs, there is no step up and the appreciation is deemed taxable income to the beneficiaries.

How does an FA compare to a bond fund?

The yield is lower, but a fixed annuity has very limited market risk. So a senior could earn 70% of a bond fund’s yield with almost 0% market risk. Not a bad risk/reward ratio.

Do both annuities offer income withdrawal benefits?

Yes, and I think the VA benefit is superior because owners can get more upside appreciation. However, actuaries have found a way to limit upside with conservative investment options. So the upside potential is being minimized more and more every day with VA withdrawal benefits.

What happens if the insurance company goes bankrupt?

Good question. With FAs, your funds would go into receivership, and it may take years to get your funds out. On the other hand, VA investment accounts are separate from the insurer so your money is not locked up. Caveat: If the funds are in the VA’s fixed account, they’d be treated like an FA.

Which annuity has more upside potential?

Of course, it’s the one with investment accounts. But there is downside risk as well. VAs protect values on death, but not so much when you are alive and kicking. With FAs, your nest egg is guaranteed and safe, but limited on its upside.

Are both annuities tax deferred?

Both accumulate tax deferred until the funds are withdrawn. Nowadays, VAs are bought mostly for the withdrawal guarantees, so tax deferral really doesn’t apply. But most FAs are still bought with tax deferral as a priority.

Both annuities are popular. What is the biggest, single negative about buying a VA or FA?

For VAs, I think it’s their high built-in fees. Some VAs have fees approaching 4% a year. So, if your accounts earned 10%, you would receive only 6%. VAs have nice withdrawal guarantees, and that’s why clients buy them. If you don’t plan on making withdrawals, VAs are wrong for you. For FAs, the real negative, currently, is the low-yield environment. Insurers try to juice their rates but most won’t yield over 2%.

The votes are in, and I am happy to say that the winner is Fixed Annuities.

FAs are more transparent and have much lower costs than VAs. When I owned a broker/dealer, I cringed every time I opened VA client statements because of their poor performance on accumulation. Yes, VAs have nice features, but if I wanted income I would buy an immediate annuity. Also, a big downside for VAs is that the tax-deferred accumulation is taxable. I was almost sued by a ticked-off beneficiary who didn’t want to pay the tax. If you want an investment, buy a mutual fund or ETF, not a VA. And if you want the best annuity, buy a fixed annuity.

Pay-it Forward:

Fixed monthly expenses like cell, cable, car and college are killing America’s youth. Do whatever you can to educate your son on minimizing or eliminating costs. You really don’t need any of the above, do you? Go the thrifty route for your college education if you can. (Hint: here’s another “C” for you–community college.)

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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About the author

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

More posts by | Visit the site of Earl E Bird

 
 
 
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